The Top Ops Predictions for 2015FTF News has compiled a report on the top 10 Ops management issues facing securities firms in 2015. This report will explore a variety of concerns from shorter settlement cycles in the U.S. to the TARGET2-Securities and Central Securities Depositories regulations in Europe. We also explore how midsize firms could shine this year, how the SEC’s consolidated audit trail could hit home for many firms, how interest rates and volatility may rise, the ongoing flow of regulation, new data infrastructures for risk management, the U.S. coming to grips with Basel III, new clearing realities for the futures market, and the future of the Legal Entity Identifier standard.

FTF News: Special RepoRt

FTF NEWS, DIGITAL EDITION, NUMBER 8. ©2015 Financial Technologies Forum LLC. All rights reserved. No part of this publication may be reproduced or transmitted in whole or in part, in any form or by any means, including but not limited to graphic, electronic, mechanical or photocopying, without written permission from Financial Technologies Forum. FTF News is an online news service and is published occasionally in hard copy by Financial Technologies Forum LLC, 330 West 38th Street, Suite 806, New York, NY 10018 USA. The opinions expressed in this publication are not necessarily those of the publishers or of the institutions of the contributing author. Neither the publishers, authors nor their employees can be held liable for any inaccuracies, errors or omissions nor held liable for any actions taken on the basis of the views expressed in this publication.

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Making predictions that pan out is an art form that few can master. However, we’re doing our best at FTF News to try and sort out what the major operations management issues will be in 2015.

The good news is that Ops managers have an embarrassment of riches when it comes to initiatives to advance operational efficiency — possibly more than in past years.

We began our predictions process at the end of 2014 by reaching out to industry analysts and participants such as Virginie O’Shea, a senior analyst with Aite Group; Tim Lind, global head of financial regulation solutions at Thomson Reuters; and Kevin McPartland, head of research for market structure and technology at Greenwich Associates. We also reached out to vendors Advent Software, DataArt and FSMLabs to round out our forecasts for 2015.

This special report is a compilation of pieces that have run online. To be sure, this is a completely unofficial and barely scientific survey of opinion, which has yielded the following list of the top 10 burning issues:

• A shorter settlement cycle is likely to progress in the U.S.

• Midsize firms could shine this year.

• The SEC’s consolidated audit trail will hit home for many firms.

• In Europe, firms will be taking on TARGET2- Securities and the full requirements of the Central Securities Depositories Regulation.

• Interest rates and volatility may rise.

• More regulation is coming just when the industry was hoping for a breather.

• Chief risk officers will need to revamp their data infrastructures.

• U.S. banks will come to grips with Basel III.

• The nondeliverable forward clearing mandate will become a reality for the futures market.

• And the Legal Entity Identifier standard could have a make-or-break year.

Of course, prioritizing these issues, along with developing a cohesive strategy, is the difficult part.

Throughout the year, FTF News will provide news and insight into the many moving parts of post-trade operations. We hope we can help you clarify your strategies and make 2015 a very successful year.

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eugene Grygo

2015: A Year Rich in Choices

Eugene Grygochief content officer, FTF News

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FtF News gathered forecasts from three vendors — Advent software, DataArt and FsMLabs — to get their operations predictions for 2015. This piece is part of our exploration of what key industry participants think will be the top Ops issues this year.

advent Software: Shorter Settlement cycles could progress the Most in 2015

Chris Momsen, executive vice president, sales and solutions management, at Advent Software, provides answers to FTF News’ questions about the operations areas that will see the most advances in 2015 and areas that will continue to see challenges.

In early February 2015, SS&C Technologies announced that it will be acquiring Advent for $2.7 billion, which observers predict will definitely shake up the top tier of Ops systems and services providers while putting the second tier of vendors on notice.

To prepare its clients for the coming year, the investment management systems and services vendor recently completed upgrades of key product suites, such as the following:

• Advent Portfolio Exchange: portfolio management, performance analytics, customer relationship management, reconciliation and reporting.

• Geneva: real-time portfolio management, reporting and investor accounting.

• The Moxy trade order management system and Advent Rules Manager for automating pre- and post-trade compliance.

Q: What area of post-trade operations will have the most progress in 2015?

a: A move to shorter settlement cycles is still at the forefront of post-trade operations and eliminating many of these manual settlement workflows could see the most progress in 2015. Shortening settlement cycles lowers business, operational, and counterparty risk to firms. Key post-trade processing technologies such as Omgeo will help, but having complementary trading solutions that easily integrate as part of the infrastructure is essential to success.

Q: What area of post-trade operations will be the most challenging in 2015?

a: Lacking the right technology to effectively communicate information to counterparties on trades could be one of the more challenging post-trade operations in 2015 — especially as it’s related to the shortening of the settlement cycle with OTC [over-the-counter] assets where central clearing is now required.

Dataart: Midsize Firms Have chance to Shine in 2015

Alexei Miller, managing director at DataArt, compiled a wide-ranging list of predictions for 2015 and is allowing FTF News to cherry-pick from his securities operations forecasts. What is presented below is directly from DataArt, which is a custom software development vendor that serves financial services firms and other industries.

Its offerings for financial services firms encompass middle- and back-office systems, risk management, support for the Form PF-based investment adviser filing with the SEC, and support for meeting the requirements of the Alternative Investment Fund Managers Directive in Europe. Vendor officials say they offer “domain

knowledge with offshore cost advantages and resource flexibility.” DataArt has software engineers in New York, London, Switzerland, Eastern Europe and Argentina.

(Not) reinventing the wheel, aka the age of consortia:

Financial firms now realize that many functions that have traditionally been built in-house (often several times for different divisions) offer little competitive advantage but carry huge price tags.

Large banks have on occasion been pooling together to address these issues in the past. In 2015, we expect to see this consortium building occur a lot more, and the trend will spill over to other sectors of the markets, including buy-side firms.

The range of functions will also widen dramatically, from reference data to research distribution to trade execution, due diligence and compliance. As a sideshow, [midsize] to large firms will ramp up efforts to spin off proprietary IT to stand-alone

What Ops Effort Will Make the Most Progress in 2015?Will this year see shorter settlement cycles, midsize firms and the SEC’s consolidated audit trail (CAT) hit their stride, as representatives from three vendors are forecasting?

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Chris Momsenexecutive vice president, sales and solutions management, Advent Software

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businesses, both as an attempt to recoup their investment and provide career options for staff. Expect to see many more asset management

back-office platform products that look awfully similar.

The squeeze in the middle will lead to more — and better — financial IT outsourcing. As IBM argues, in today’s environment both large banks and niche specialized players tend to do well, with the former benefiting from sheer scale and the latter from aggressive pursuit of the market’s most desirable customers.

This trend is positioned to also extend to the buy side, and midsize asset management firms will have to out-innovate the small guys while pushing their operations to their limit in order to survive. Firms, increasingly unable to keep all of their IT in-house for cost and time-to-market concerns, will lead the next wave of “smart outsourcing” by working with select providers that can drive business outcomes, invest heavily, and share in success by taking ownership and commercializing technology across clients.

Small shops can’t afford this approach and larger firms struggle to look beyond old-school staff augmentation models, so this is really the chance for midsize firms to shine — or be squeezed.

the war for talent will get brutal and funny:

In the last three years, as the extreme heat generated by Silicon Valley warmed Silicon Alley, young geeks have begun slowly turning away from Wall Street careers toward flip-flops and the stock-options-laden consumer Internet economy.

We have now crossed the tipping point, with startup kids threatening to disrupt the industry itself. (For instance, Marc Andreessen [Mosaic co-creator, Netscape Communications founder and venture capitalist] proclaimed, modestly, “We can reinvent the entire thing.”)

For financial CTOs [chief technology officers], recruiting will no longer be a matter of efficiency, but one of sheer survival.

Expect some comic relief as uptight bankers try to play cool. Outsourcing vendors will benefit, too, but only if they can up their game to deliver real solutions, not staff augmentation.

FSMlabs: Sec’s cat to Drive Data integrity in 2015

FSMLabs is a specialist in system software with “a particular focus on adapting ‘off the shelf’ technology to high performance and critical response time applications,” officials say. FSMLabs provides clock synchronization and time-stamping technology with microsecond accuracy that provides detailed transactional data for trading. Time stamping is helpful for both post-trade processing between firms, as well as for regulatory audits or mandates that will require detailed trading data, say company officials. Recently, Victor Yodaiken, CEO of FSMLabs, discussed his predictions

for how technology will be used to address market failures, create more reliable reference data and build a better-functioning market.

Yodaiken cites the following areas as the most important this year:

Data governance and the consolidated audit trail (cat):

Governments and global regulatory agencies in the U.S. and Europe have cited the importance of data integrity in market transactions. The success of industry initiatives like the SEC’s CAT will require financial services institutions to examine their trading data in 2015 to ensure its precision down to the microsecond.

cloud adoption:

Financial services firms have finally begun to accept cloud technology as a useful tool. FINRA [the Financial Industry Regulatory Authority] migrated toward Big Data analytics and cloud-based technology for market structure surveillance and used its successes as the bid for CAT.

clock synchronization:

Time synchronization has gained attention from regulators, exchanges and traders following a series of high-profile market structure mishaps and closer examination of high-precision, reliant HFT [high-frequency trading] strategies. The use of time synchronization technology, more reliable reference data feeds and more network analytics will be essential for those companies with data integrity challenges, standards and infrastructures as they attempt to meet new requirements.

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Alexei Millermanaging director, DataArt

Victor YodaikenCEO,FSMLabs

We have now crossed the tipping point, with startup kids threatening to disrupt the industry itself.

Continued from Page 3

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As part of our series on post-trade operations predictions for 2015, FtF News gathered forecasts from key industry analysts. For Virginie O’shea, a senior analyst with Aite Group, FtF News asked her to name the Ops area that will see the most progress in 2015 and the post-trade activities that could prove to be the most challenging. At Aite Group, O’shea covers data management and post-trade technology issues.

Q: What area of post-trade operations will have the most progress in 2015?

a: It is going to be a busy year for post-trade operations executives, especially those based in Europe. Not only is the first wave of countries of TARGET2-Securities [T2S] coming online in the summer, the full requirements of the CSD [Central Securities Depositories] Regulation have just come into force, following the move to T+2 [shortened settlement cycles] in October last year.

These developments are transforming the securities settlement landscape and one can expect to see a direct impact on the competitive environment for custodians, asset servicers and CSDs across the region and beyond. Financial penalties for settlement failure should compel firms to begin to examine areas of inefficiency in the settlement process — the management of standing settlement instructions comes immediately to mind as a function

that requires attention with regard to poor-quality data.

The OTC [over-the-counter] derivatives markets will also face continued change in the areas of clearing and trade reporting as other key markets across the globe introduce requirements throughout the year, following on from the U.S. and Europe.

The recent ISDA [International Swaps and Derivatives Association] survey highlights that margining for uncleared derivatives is a particular point of concern and this reflects the ongoing investment that will be witnessed in the collateral management function. T2S and the trans-Atlantic agreement in place among CSDs for collateral pooling will also lend itself to accelerating the pace of development in this area.

Q: What area of post-trade operations will be the most challenging in 2015?

a: All of these developments will come with their challenges and we are likely to see other challenges arising from developments that happened last year, such as the move to T+2.

The long tail of firms that are currently dealing with heavily manual processes in the confirmation and affirmation area is likely to struggle as the changes related to T2S and CSDR come into force this year — especially the penalties regime.

Any sell-side firms that are supporting the lower end of the buy-side market are also likely to come under heavy pressure to this end.

The increased transparency overall for clearing and settlement is likely to cause headaches for those struggling to make margins in the asset-servicing arena and this could see many more exit the business. Given the altered competitive landscape due to pan-European barriers potentially being broken down, domestic players will experience the greatest pressure.

I expect 2015 to continue to be dominated by exits and consolidation in the post-trade landscape overall.

eugene Grygo

Ops Execs Will Be Busy in 2015Virginie O’Shea, senior analyst for Aite Group, checks in with FTF News about the Ops road ahead for 2015.

Virginie O’Shea senior analyst, Aite Group

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For this year, most chief risk officers (CROs) at financial services firms will be bearing down on costly risk data architectures, credit analytics,

fraud and cyber-security with the hope of creating new risk efficiencies, according to key predictions from International Data Corp. (IDC) Financial Insights, a market research subsidiary of International Data Group.

In short, cloud computing, Big Data and analytics platforms will provide “opportunities every month to scale and strengthen the CRO’s ability to mitigate risk, perfect risk taking, and contribute to growth and shareholder value,” says Michael Versace, global director for risk and IT strategy at IDC Insights. The overriding assertion from an IDC Web conference is that 75 percent of CRO time will be devoted to data aggregation, analytics and reporting.

a roundup of the predictions follows:

• Partially driven by Big Data solutions, fraud and financial crimes analytics will cost global financial institutions $2.8 billion for software and services by 2016.

• Institutions will increase investments in risk culture through enterprise education by more than 15 percent in 2015.

• Industry clouds will disrupt legacy risk operations and contribute to 10 percent reduction in “know your customer” and other compliance costs by 2016.

• Virtually all CROs will be engaged in credit risk modernization initiatives through 2016.

• By 2016, the threat intelligence security services market will grow a 20 percent compound annual growth rate (CAGR), with consulting services leading the growth.

• By 2017, with workable boundaries of regulation at state and federal levels, financial institutions will find their role in clearing cryptocurrency.

• And through 2016, operational risk spending will grow at 8 percent CAGR.

IDC Financial Insights is not alone in predicting that there is a growing need to overhaul risk infrastructures, and that the price tag for doing so will be high. The major variable, though, is whether firms are willing to pay the price for the overhauls.

The securities compliance analysts at vendor Wolters Kluwer Financial Services have released a report outlining

their predictions for the regulatory outlook in 2015. Given that only about half of Dodd-Frank has been finalized, in general the report expects that the pace of regulation will continue to increase over the course of the year.

“It has been seven years since the beginning of the financial crisis, yet the full impact of regulatory change on the strategies, business models and operations of securities firms remains unclear,” says David Thetford, securities compliance principal analyst with Wolters Kluwer Financial Services. “While we still may not have a complete picture of the global regulatory response, firms that are prepared to anticipate and manage ongoing regulatory change will be better-positioned to grow safely and profitably.”

Some of the report’s highlights include the following:

• Cyber-security is at the top of everyone’s mind, which means an increased focus on technology at all firms.

• Tier-1 financial holding companies will likely have to comply with stricter capital requirements.

• Regulators’ increasing use of discretionary tools means firms are likely to become much more familiar with stress testing, solvency testing and supervisory exams.

• And most firms still do not have everything in place to comply with the Volcker Rule. More delays may tempt firms to reduce their sense of urgency, which may prove painful in the long run.

As the regulatory focus shifts, there will be more chances to propagate rules across international jurisdictions and sectors as governing bodies interpret and implement such nuances as those of the Foreign Account Tax Compliance Act, stress testing, and liquidity and capital requirements, according to the Wolters Kluwer analysts.

eugene Grygo

Chief Risk Officers Face Costly Data OverhaulsIDC Financial Insights analysts foresee big changes for data architectures that support risk, credit and cyber-security management.

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Ryan Boysen

Wolters Kluwer Analysts Foresee More RegulationSecurities compliance analysts at vendor Wolters Kluwer Financial Services compiled their predictions in a report.

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As part of gathering post-trade operations predictions for 2015, FtF News has been checking in with industry analysts. Luckily, Kevin McPartland, head of research for market structure and technology at Greenwich Associates, compiled a list of predictions, dubbed “15 for ’15: Top Trends to watch in 2015,” and he has allowed FtF News to cherry-pick excerpts from it. The numbering reflects McPartland’s ranking. At Greenwich Associates, McPartland helps clients navigate market structure changes driven by regulation, technology and behavior shifts.

No. 1: Rates and Volatility Finally Rising

This is an economic trend and not a market structure one, yes. But given that Fed policy impacts pretty much everything these days, including market structure globally, it can’t be ignored. The market has been obsessed with the timing of a Fed-induced rate rise since at least 2013.

While comments over the past 18 months from both Ben Bernanke and Janet Yellen should have induced a rise in rates, they remain no higher than they were in the summer of 2011. I am no economist, but I do believe that both the futures market and Yellen’s own words mean rates will finally begin the journey upward in 2015.

And with rising rates (and declining bond prices), volatility should start to return across the board. The

accompanying increase in trading volumes should create more opportunities for everyone involved to make money — which in turn should buoy the entire financial services sector.

No. 2: U.S. Banks Getting a Real taste of Basel iii

If volatility and interest rates were all that banks had to deal with in 2015, then the future would look pretty bright. Sadly, structural changes brought about by regulations continue to beat up the bottom line. With much of Dodd-Frank now implemented, the biggest elephant in the room in 2015 is Basel III.

Full global implementation of the rules will not be completed for several more years, but one of the first big impacts to the U.S. banking industry will hit this year — disclosure of the supplementary leverage ratio (SLR). The SLR is the U.S.’s interpretation of leverage ratio requirements defined by Basel III.

While the banks have been preparing their balance sheets for this for some time, the market will finally have a more apples-to-apples comparison of

bank leverage. As the last few years have taught us, disclosure brings with it questions, and questions often lead to change.

If volatility and interest rates were all that banks had to deal with in 2015, then the future would look pretty bright.

No. 9: NDF clearing Mandate impacts the Futures Market

I first started looking at nondeliverable forward (NDF) clearing in 2012. Here we are entering 2015, and what do we have? Nothing. Only assurances that the CFTC is “looking at it.”

By the letter of the law, NDFs meet the criteria to be mandated for clearing. But the longer we go with no mandate, the more we start to wonder if it’s worth everyone’s time. NDFs make up about 3 percent of the overall FX market, which doesn’t feel like systemic risk. And the

Kevin McPartland, head of research for market structure and technology at Greenwich Associates, predicts the market’s obsession with Fed policies will be justified in 2015.

Interest Rates, Volatility to Rise in 2015: Greenwich Associates

Kevin McPartland principal, Greenwich Associates

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initial margin requirements would be punitive as clearinghouses will be forced to manage the risks inherent with volatile currencies. I do not suspect, however, that those things concern the CFTC.

Their job is to implement the law, and to do so they need to put NDFs into clearinghouses.

No. 11: european Mandatory clearing coming on Scene

Mandatory clearing will finally hit Europe in 2015, but not with the same splash it did in the U.S. First, most clients won’t be required to clear until 2016. Voluntary clearing may start to take hold as dealers pass along the higher capital costs of doing bilateral trades, but most clients will take a slow and measured approach to clearing until they are told they have to get moving. Second, mandatory client clearing has been done before. Sure, European and U.S. rules are different, as are the clearing models themselves.

But the U.S. made enough mistakes along the way that the Europeans are sure to avoid many of the same pitfalls.

The best part of mandatory clearing in Europe? Global harmonization is finally starting to arrive, and with it, fewer ways to avoid changes that are at this point inevitable.

No. 12: continuing Reduction of U.S. Swap-clearing Members

One of the major goals of financial reform was to expand the list of sell-side service providers used by institutional investors in the hopes of reducing systemic risk.

With more firms available, the thinking goes, the less risk to the system if one should fail. While that theory still holds, the regulations thus far have had the exact opposite effect. For example, Greenwich research shows 65 percent of client swaps trading going through the top five banks. Clearing is next.

In the past few months, two major banks have decided to no longer clear swaps for clients. Too much work and too much money for too little (if any) profit. In 2015 we expect to see more of the same.

Even the biggest FCMs [futures commission merchants] are crying foul to regulators, pointing out that it’s nearly impossible to make money clearing swaps under the current regime.

And while regulators don’t often concern themselves much with the banks’ ability to make money, banks won’t clear swaps if they can’t make a profit — and investors and corporate end users will be left looking for new bilateral alternatives. Certainly not the outcome Washington was looking for.

Even the biggest FCMs [futures commission merchants] are crying foul to regulators, pointing out that it’s nearly impossible to make money clearing swaps under the current regime.

Continued from Page 7

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FTF News interviewed industry veteran Tim Lind, global head of financial regulation solutions at Thomson Reuters, to complete the post-trade operations predictions for 2015. Lind is the 2013 recipient of the FTF News Technology Innovation Award for FinTech Innovator of the Year.

Lind touched on several subjects but a key concern is the Legal Entity Identifier (LEI) standard, a 20-digit, alphanumeric code intended to identify participants in global financial markets and via financial transaction. The use of a unique identifier is intended to bring greater transparency to securities trading and has gained ground in swaps transactions as a result of standards bodies’ and, in the U.S., the CFTC’s efforts.

“I think the headline for 2015 is that it is, in my view, a turning point in the evolution of the system — 2015 is a make-or-break year for LEI,” Lind says. The key for the

standard’s future is clarity on the central operating unit (COU), which is the keystone of the LEI federation as it will be the site of “an aggregate source of LEI information,” Lind says.

During 2014, the board of the Global Legal Entity Identifier Foundation (GLEIF), established by the Financial Stability Board (FSB), began taking steps toward a global LEI system. In addition, the FSB, created by Group of Seven and Group of 20 finance ministers and central bank governors, coordinates the work of national financial authorities and international standard-setting bodies as they build support for the LEI standard.

As of December 2014, 330,000 LEIs have been issued, according to GLEIF officials. In the meantime, the LEI standard has been mandated by the CFTC, the European Securities and Markets Authority, and the European Banking Authority. Its use is under consideration by other financial regulators and regions around the world.

“In the absence of the COU, you kind of have the Wild West,” Lind says. There are local operating units (LOUs) and other components of the LEI federation, “but there’s no really definitive source” for aggregated

LEI data. “That COU is really the heart of the system.”

For 2015, the bureaucracy behind the LEI standard must present dates and delivery times for the COU, Lind says. “The clarity for that has to be achieved in 2015. Every day without it is a deferral of the realization of LEI.”

Tim Lind: ‘2015 Is a Make-or-Break Year for LEI’The industry veteran argues that the identifier standard has a few hurdles ahead before it can claim victory this year.

eugene Grygo

Tim Lind global head of financial regulation solutions, Thomson Reuters

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In the absence of the COU, you kind of have the Wild West.

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Tim Lind, global head of financial regulation solutions, Thomson Reuters

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The COU must come to fruition in 2015 to build upon the momentum of the creation of LOUs in key countries and regions, Lind says. “There is nothing cohesively controlling these local operating units,” he says. “Whether or not they see it as a business opportunity for themselves, LEI was not created to facilitate a data business model. It was meant to be a social good and risk management tool. It wasn’t created for people to enter the business. … But now it’s time to put hard and fast dates on the COU. That’s what’s missing for me.”

Lind adds that the scope of the LEI standard has to be broadened beyond swap market participants to include “the most important entities on the

planet,” which are the issuers of debt and equity. “There is no regulatory mechanism for issuers of equity and debt to petition, register and be assigned an LEI. They are not subject directly to any regulation that requires them to do so.”

JPMorgan, for instance, as a swap industry participant will get an LEI, which may or may not represent the part of JPMorgan that issues equity, Lind says.

A remedy may exist between the promising similarities in the functions of the incumbent numbering agencies overseeing securities identification and the LOUs — they might be able to work together, Lind says.

If not, in 2015, the LEI standard could be limited to “this swap disclosure function and not be used in risk and aggregated exposure resolution,” he argues. “I think that’s what needs to go.”

Industry participants, associations and standards groups have come too far to let the LEI push fail, Lind says. “I don’t know how we could let that happen. … There’s nothing fundamentally standing in the way of LEI being successful,” he says. “If not now, when?”

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LEI was not created to facilitate a data business model. It was meant to be a social good and risk management tool. It wasn’t created for people to enter the business.

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Tim Lind, global head of financial regulation solutions, Thomson Reuters